A Budget with Tight Margins
On August 7, 2026, work officially began on the 2027 budget bill, the fifth budget proposal of the government led by Giorgia Meloni. The executive branch is operating within a tighter framework than in previous years. On the one hand, Italy is expected to exit the excessive deficit procedure initiated by the European Commission in 2026: the European Commission’s spring forecasts project Italy’s deficit-to-GDP ratio at 2.9% in 2026, down from previous years, and its debt-to-GDP ratio at 138.5%. On the other hand, a significant portion of this leeway is already tied up by the burden of construction tax credits inherited from the previous legislature: according to estimates presented to Parliament by the State General Accounting Office in June 2026, of the 142 billion in tax credits held by the Revenue Agency, 13 have been determined to be fraudulent, and the remaining approximately 130 are still to be utilized; of these, 109 billion are earmarked for tax offsets—that is, to reduce government revenue—with 70% concentrated in the 2023–2027 period, with a current estimated impact of approximately 3 billion per month on public finances.
The 110% superbonus, introduced in May 2020 by the Conte II government, was reduced by the current administration to 90% as early as the first budget bill—that for 2023—but the tax credits accrued in previous years continue to be carried forward into subsequent budgets: the Court of Auditors itself, in the summary of the report on the 2025 General State Accounts prepared by the joint audit committees, attributed the discrepancy between the projected deficit (3.0% of GDP) and the actual deficit (3.1%) for the year precisely to the unexpected emergence of new construction tax credits authorized under the previous legislation on the superbonus.
Added to this is the end, on June 30, 2026, of the implementation phase of the National Recovery and Resilience Plan: according to the monitoring report prepared by the research services of the Chamber of Deputies and the Senate, as of July 1, Italy had received 165.99 billion euros out of a total of 194.4 billion (85.4%), with 416 of the 575 overall milestones and targets achieved (72.3%, above the EU average of 57.9%) and 503,641 of the 672,549 projects registered on the ReGiS platform completed (74.9%); 28.4 billion from the final installment remains to be disbursed, contingent upon the achievement of 159 milestones by the end of June. The end of deficit surveillance and the expiration of the extraordinary European funding channel thus compound a legacy of outstanding obligations, reducing the government’s room to finance new measures. The schedule calls for Istat’s review of the 2025 deficit on September 22 and the submission of the budgetary policy document to Brussels on October 15—a step on which the actual amount of available resources will depend.
The Measures on the Table
On this front, a preliminary note is in order: the budget bill does not yet have a final text, and the available information consists, by definition, of journalistic speculation regarding options under consideration—not measures that have been decided. Early estimates indicate an initial budget allocation of approximately 15 billion euros. On the tax front, the most likely scenario is the extension of the second IRPEF tax bracket of 33%, currently applied to income up to 50,000 euros, to the 60,000-euro threshold, with estimated savings ranging from 100 to 1,000 euros per year depending on income and a total cost of 2.7–3 billion, to be covered in part by a review of the more than 600 existing tax deductions and credits. On the social security front, the main issue remains the retirement age, which—without corrective measures—would rise by three months to 67 years and 3 months starting in 2027; a flexible “Quota 41” system is under consideration, with annual penalties of 2% for those retiring early, at an estimated cost of up to 3 billion. On the labor front, the government aims to extend the social security contribution relief introduced by the “May 1” decree, up to 500 euros per month (650 in southern Italy) for permanent hires of those under 35, in addition to an 800-euro bonus for female employment. Regarding housing, there is talk of a 50% VAT cut on rents for those under 36, though this would be limited solely to contracts signed with construction companies. Since, as mentioned, these are proposals that have not yet been formalized, their confirmation will depend on the results of the September review of public finances.
Unresolved Issues
Several issues remain without guaranteed funding. The one-time revaluation of minimum pensions, which affected over 2.6 million beneficiaries, expires at the end of 2026, and its extension is not yet guaranteed, posing a real risk of a loss of purchasing power for those affected. Regarding the NRRP, over 168,000 projects registered in ReGiS were still ongoing as of July 1, and some of them may fail to certify the completion of work by the European deadlines, requiring alternative funding from the national budget or other EU funds—a burden that falls squarely on the budget bill currently being prepared. Finally, the timing and procedures for Italy’s definitive exit from the excessive deficit procedure remain to be clarified: in the Chamber of Deputies, Economy Minister Giancarlo Giorgetti warned that another breach of the 3% deficit threshold in subsequent years would keep Italy in the procedure even if the excess stemmed from expenditures permitted under the safeguard clause for defense and energy.
Continuity with Previous Budget Measures
The 2027 budget builds on a path initiated with the government’s first budget law—the one for 2023—which focused on reducing the tax wedge, extending the flat tax for self-employed individuals with annual revenues up to 85,000 euros, and, as noted, scaling back the building superbonus from 110% to 90%. The 2024 and 2025 budget measures consolidated this approach, reducing the number of IRPEF tax brackets from four to three—23%, 35%, and 43%—and transforming the tax wedge reduction from a temporary measure into a structural deduction, accompanied by a birth bonus and experimental measures regarding the family quotient.
The 2026 budget continued along this trajectory, further lowering the second tax rate from 35% to 33% for incomes up to 50,000 euros. The proposal to raise the threshold for applying that same tax rate to 60,000 euros for 2027 thus appears to be the continuation of a multi-year plan to selectively reduce the tax burden on the middle class, rather than an entirely new measure.
However, there is still room for different interpretations of this path. According to an analysis by the Parliamentary Budget Office cited by Pagella Politica, the reform of the tax credit system linked to the reduction of the tax wedge—while keeping statutory tax rates unchanged—has raised the effective marginal tax rate for incomes between 32,000 and 40,000 euros to 56%, a level higher than that of 2024. The stepped structure of the new deductions—common, after all, to any system of degressive tax relief based on income brackets—results in higher rates in the income brackets where the benefit begins to phase out: of the 19.1 million taxpayers affected, 12.3 million see no substantial changes, 5.7 million receive a greater benefit than in the past, while approximately 800,000 face a reduction and 300,000 lose their employee tax relief entirely. This data helps put the new proposal on the second tax rate into context, as it builds upon a system of deductions that has already become more complex than the original three-rate structure.
The New Priority: Defense and Energy Security
Compared to previous budget measures, the most significant change concerns defense and energy security—areas in which the government has decided to invoke the national safeguard clause provided for in the European Union’s budget rules, which allows certain strategic expenditures to be excluded from the calculation of deficit limits. In presenting the request to the Chamber on August 5, Minister Giorgetti quantified the need at 0.9 percentage points of GDP for defense and 0.6 percentage points for energy, cumulatively through 2028, for a total of approximately 35–36 billion euros (22 billion for defense, 14 for energy); while acknowledging that this is a “difficult” and “unpopular” request, the minister justified it by invoking Article 52 of the Constitution: “One does not shirk duty, one does not run away from it, one does not desert it.” Even the ruling coalition is not entirely united on this point: the League secured an amendment to the parliamentary resolution to limit the use of the European Safe fund solely to “defense and national security technology systems,” a sign of internal debate over the scope and nature of rearmament.
This decision fits within a framework defined at the European level. In March 2025, the European Commission presented the White Paper on European Defense and the ReArm Europe plan—later renamed Readiness 2030—aimed at mobilizing up to 800 billion euros in investments in the continent’s security through five distinct instruments, including the 150-billion-euro SAFE fund for joint purchases of military equipment. During the initial phase of the national safeguard clause, which ended on April 30, 2025, sixteen Member States chose to activate it; Italy, at that stage, did not submit a request for an exemption. A few months later, the NATO summit in The Hague in June 2025 set, in its official declaration, the target of spending 5% of GDP on security by 2035, divided between 3.5% for military spending proper and 1.5% for infrastructure and resilience. Italy is currently far from that target. The Ministry of Defense’s budget estimate for 2026 allocates 23.687 billion euros to defense, an increase of 842.3 million compared to 2025—the ninth consecutive year of growth, representing a total increase of over 10 billion since 2017: of this amount, 9 billion and 349.8 million are investments (+1.7% compared to 2025), 11 billion and 763.8 million are personnel expenses (+3.7%), and 2 billion and 573.8 million are operating expenses (+11.8%). However, this figure refers solely to defense in the strict sense, excluding items included in the NATO benchmark, such as the Carabinieri; the government itself plans to allocate an additional 0.5% of GDP—approximately 12 billion annually—to security only starting in 2028, which is necessary to move closer to the Alliance’s new targets.
From the perspective of the national interest, closing this gap is not merely an accounting obligation to allies: defense capabilities influence Italy’s negotiating weight within NATO and the European Union, in a context of widespread rearmament across the continent triggered by Russia’s invasion of Ukraine and growing logistical challenges—road, rail, and port networks that are not always adequate for transporting heavy vehicles—which limit the European armed forces’ ability to project power. On the negotiating front, Italy’s request for flexibility is also intertwined with the broader debate over the Union’s upcoming multiannual budget, totaling two thousand billion euros, on which member states remain far from reaching an agreement.
A Budget Balancing Internal Constraints and the International Context
Overall, the 2027 budget outlines an economic policy direction that combines three elements: the continuation, with limited resources, of the reduction in the tax burden on labor initiated in previous budgets; the management of unresolved legacy issues—from the residual cost of construction incentives to minimum pensions, through to the completion of the National Recovery and Resilience Plan (PNRR); and the opening of a new, structural spending front linked to defense and energy security. Viewed through the lens of the national interest, this approach has two distinct dimensions. Exiting the excessive deficit procedure would expand Italy’s autonomy in setting its own budgetary priorities, reducing the degree of external influence on economic policy decisions. The increase in defense spending—though still far from NATO targets—simultaneously strengthens Italy’s negotiating position within the Euro-Atlantic framework, just as the European Union is redefining the balance of its security and discussing a multi-year budget of two thousand billion euros.
For Italian citizens, the concrete effects will depend on the actual amount of resources that become available following the September budget review: those with medium-to-high incomes would benefit from a modest income tax (IRPEF) reduction, ranging from a few dozen to about 1,000 euros per year, while the issue of the purchasing power of minimum pensions and the funding of local PNRR projects not completed on time remains unresolved. It should be noted that a significant portion of the missing funds is absorbed by debt service and construction incentives inherited from the previous legislature—not by decisions made by the current administration. In this sense, the 2027 budget operates on two tracks: honoring growing international security commitments—which the government itself has framed as a constitutional duty—without compromising the path toward fiscal consolidation. This is taking place within a geopolitical context in which calls for a greater European contribution to defense, including from Washington, make decisions on national rearmament increasingly difficult to postpone.
